Do registration costs matter that much?

Recently I saw this paper by Leora Klapper, Anat Lewin, and Juan Manuel Quesada Delgado. The authors find that there are important benefits to making business registration simpler. They say:

Tests show that business registry modernization (often a component of broader private sector reforms) has a positive impact not only on the ease of creating a business, but also on new business registration. Overall, the data show that a quick, efficient, and cost-effective business registration process is critical for fostering formal sector entrepreneurship.

I also saw this post from Mohammad, which talks about the most important obstacles cited by informal firms for business registration. Taxes paid in the formal sector, to nobody’s surprise, are the biggest obstacle. But more surprisingly (at least for me), lack of good information on how to register is the second biggest obstacle and registration fees are the third biggest obstacle.

Case closed? Making business registration quicker, easier, and cheaper will lead to important benefits to the economy? Maybe, but there is an alternative view.

Arruñada (2007) is critical of the recent emphasis in policy circles on reducing the initial costs of setting up the firm (ungated version here). This article makes several important points and is definitely worth a read. The argument is continued in Arruñada (2008), which says:

Moreover, the macroeconomic benefits of reducing the cost of initial formalization, which is just a tiny component of total entry costs, should not be exaggerated. Entrepreneurs remain informal mainly because formalizing their businesses increases their tax burden without—in many developing countries—reducing their transaction costs.

This is an important debate and I don’t think there are easy answers. I plan to continue posting on this topic.

Comments

De Soto argues in his book "The Other Path" (2002) that by reducing the cost and time to legalize in Peru, 270.000 businesses moved from the informal to the formal economy resulting in $1.2 billion additional tax revenues in just a few years.
I don't think it is one or the other, but the sum of all the barriers that prevent people from moving into the formal economy.